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Japan’s political leadership is pushing for the faster development of digital currency to keep up with other countries, particularly with China.
The Japanese government has allotted more people to examine the legal and technical aspects of issuing a central bank digital currency (CBDC), which refers to the digital form of existing currencies. In the latest bid towards using digital currency, a consortium of 74 Japanese banks – called the Digital Currency Forum – are planning to issue digital yen as their liability.
The members are planning to issue a digital yen that will work similarly to bank deposits by the end of 2022. By early January, the consortium members plan to participate in experiments to gauge digital yen’s use in industries ranging from energy to retail, according to their whitepaper progress report.
The consortium includes the country’s megabanks like MUFG Bank, Sumitomo Mitsui Banking, Mizuho Bank, Japan Post Bank, as well as industry heavyweights like the Nippon Telegraph & Telephone Corp., East Japan Railway, and Mitsubishi Corp. Meanwhile, the Bank of Japan, the Financial Services Agency of Japan and three ministries are observing its activities.
Japan’s plot for digital yen
Japan’s central bank has taken a cautious, gradual approach to issue the digital yen. But the recent increased political attention to digital currency development is expected to put more pressure on the Bank of Japan (BOJ) and likely result in additional direct investment into the initiative.
Takayuki Kobayashi, the newly installed Minister for Economic Security, pointed out the possible impact on the country’s national security if Japan lags behind other countries in issuing CBDC. Kobayashi added that Japan should accelerate its efforts, so it’s prepared to issue a digital yen any time.
However, the BOJ only began its first phase of CBDC testing in April and has expressed that it has no plans to issue a digital yen immediately in Japan, and plans to begin the second phase in April 2022. These will focus on key features such as setting a limit on the amount of CBDC an entity can hold.
In October, BOJ executive director Shinichi Uchida said that if Japan develops a digital currency, it should have a simple design that enables private companies to develop financial and payment services for customers. He cited an example involving the use of both CBDC and private payment means within a single wallet.
The urge for Japan to move forward with a digital yen comes at a time when China is already miles ahead of other nations when it comes to CBDC.
Some of Japan’s ruling party lawmakers perceive China’s progress with its digital yuan as a threat to the US dollar’s status as a global reserve. They call on the Japanese government to cooperate with the US to counter any attempt to threaten the dollar’s reserve-currency status. And even opposition parties in Japan call for an accelerated development of a digital yen.
However, BOJ officials argue that China’s progress in issuing a digital yuan does not affect its timeframe for CBDC experiments. They stressed that the key purpose of issuing a digital yen in Japan is to offer a convenient and efficient way for the Japanese people to make payments and settlements.
China’s progress on CBDC development
China has already rolled out its virtual yuan in trials across several provinces. Its central bank, the People’s Bank of China (PBOC), has been working on the project since 2014 and is conducting real-world trials for the digital yuan, officially known as the Digital Currency Electronic Payment (DCEP).
The DCEP will serve as a way for the PBOC to digitalize its banknotes and coins already in circulation. This is not surprising as the Chinese market is already considered advanced in terms of cashless payments.
Yan Xiao, project lead for digital trade at the World Economic Forum, pointed out that the use of cash is already declining in China. This is one of the drivers in the push for a digital yuan issuance, he said in a note.
Last year, PBOC deputy governor Fan Yifei explained that the high cost of cash and coin production and storage highlights the urgency of digitalizing them. Fan also argued that cash and coins are not easy to use, are easy to counterfeit, and could be utilized for illegal activities due to their anonymity.
The central bank deputy governor also explained how a CBDC could help improve financial stability while having ‘controllable anonymity.’ This refers to the fact that payments made with digital yuan would still be anonymous, but the PBOC could use data analysis tools to identify illegal activities.
